Honest Money Part V: History of American Money & Banking

During the 17th century, American settlers were starting to grow from small
colonies and villages into larger towns and cities. Barter was the earliest
method of trade, the direct exchange of one good for another. Soon certain
commodities became most favored, such as furs and tobacco. In Virginia, warehouse
receipts for bales of tobacco circulated as money.

As the colonies grew in size, so did their need for trade and commerce. The
increased division of labor naturally progressed from direct exchange (barter),
to indirect exchange: the use of a common medium - money. The discovery of
new ports increased the number of ships from distant lands, bringing with them
foreign gold and silver coins. English coins, French coins, and especially
Spanish coins were becoming the money of choice.

Many authors have written about a shortage of money in colonial times. There
was a deficiency of sound money, due to specific reasons, but a lack of money
there was not. By the 1700's, Colonial money included a diverse selection of
media: gold and silver coins; book-credit; various commodity money substitutes,
and several different types of paper notes.

EARLY PAPER MONEY

During the mid to late 1600's, Massachusetts would often send expeditions
to the French settlements in Quebec to loot and plunder. These raids were usually
quite successful and productive. The soldiers would return home, sell their
booty for profit, and be content.

In 1690, after a particularly disastrous raid, soldiers returned to Boston
in a foul mood - demanding to be paid. The government, not being in possession
of the needed goods or coin, came up with the idea of printing paper notes,
supposedly redeemable in gold and silver, to be procured from up and coming
tax receipts. No further paper money was to be printed until the first issue
had been paid off in specie.

Within a few months time the issue ran short, and the government printed another
series of notes. It was quickly found out, that the purchasing power of the
notes was rapidly declining compared to gold and silver coin. The people realized
the paper would never be redeemed as promised.

What did the government do to solve the dilemma? They resorted to one of the
King's favorite prerogatives: forced legal tender laws. Paper money was declared
compulsory for all debts, and a 5% discount was offered for all government
debts paid in paper.

Suddenly nearby States of Connecticut and Rhode Island began to issue paper
money. The race was on. In 1716, Massachusetts decided to form a government
land bank, and to issue notes backed by the land.

Prices on everything began to rise dramatically. The purchasing power of paper
kept falling. Silver and gold coin had all but disappeared. This is the scarcity
so often referred to, but it was a man-made scarcity of specie, caused by the
excess emission of paper money, mandated to be legal tender for all debts.
It was nota natural scarcity due to free market laws of supply and demand,
but one of contrived government intervention.

By 1740, paper money had depreciated to near worthlessness compared to gold
and silver coin. Massachusetts's exchange rate was 11 to 1; Connecticut's was
9 to 1; Carolina's 10 to 1; and the infamous "winner" was Rhode Island - with
the unbelievable rate of 23 to 1. Inflation had come full circle in just 50
years.

The following year, Parliament passed an act to restrict the various schemes
within the American Colonies that involved paper money. In 1751 and 1764, Parliament
passed acts to regulate and restrain bills of credit from being declared to
be legal tender, in any of his Majesty's Colonies.

BANK OF NORTH AMERICA

The Bank of North America was chartered in 1782; the first government sanctioned
central bank. Its home was Philadelphia. This was the first organized public
institution of the elite moneyed interest. Robert Morris was appointed Financial
Agent (Secretary of the Treasury) of the United States, so as to be able to
oversee the operation of the Bank.

The government authorized the Bank of North America's notes to be receivable
for all duties and taxes for all governments; and they were to exchange at
par with specie. No other bank of issue was permitted. In return for the government's
unprecedented largess of such limitless power of monopoly, the Bank of North
America did what all patriotic bankers do: they offered to loan the government
all the money it needed to finance the public debt with - while the American
taxpayers paid the bill.

Robert Morris was an elite collectivist. He dreamed of a centralized government,
with the power to tax its citizens, creating a system of perpetual government
debt; all to be monetized by the fractional reserve lending of paper money.
He submitted his plan to Congress and they approved, issuing the charter for "his" bank.

This was a wealth transference system of the elite collectivists, which in
Morris's own words would be a windfall to speculators of public debt - at the
expense of the taxpayers; that would cause "wealth to flow into the hands that
could render it most productive".

An interesting side note: Morris was unable to raise the required specie reserves
for the bank. As one of the prominent members of Congress and the Government's
Financial Agent, Morris was able to appropriate specie on loan from France
to the United States, and invested it "for the government" in "his" own bank.

This meant that the majority of specie capital for Morris's bank came from
government accounts. These funds were then borrowed back by Morris from the
bank, under the ruse of being the Government's Financial Agent; funneling the
money into government contracts with his own personal business associates,
to provide war provisions to the government. Why he wasn't charged with embezzlement
boggles the mind, and defies the most basic ideals of jurisprudence.

By the end of 1783, the first experiment with a central bank had ended - badly,
and the Bank of North America was closed down. Morris convinced his Philadelphia
connections to issue him a state banking charter, and he quickly changed the
bank over to a private commercial institution.

FIRST BANK OF THE UNITED STATES

The First Bank of the United States was the brainchild of Alexander Hamilton,
although not his first. In 1784, Hamilton had started the commercial Bank of
New York, one of only three commercial banks in the country: the other two
being Morris's bank in Philadelphia and the Bank of Massachusetts in Boston.
The strategic geographical location of the three banks was not by coincidence.
This was the second public display of the elite moneyed interest.

Cut from the same cloth as Morris, Hamilton was a statist who believed in
a centralized form of government that controlled all aspects of the country
- especially money, banking and trade. Hamilton's true reasons for wanting
a central bank were revealed when he wrote:

"All communities divide themselves into the few and the many. The first
are rich and wellborn, the other the mass of the people. The people are turbulent
and changing; they seldom judge or determine right."

This aristocratic indifference to the lower orders of his fellow man is the
signature of the elite collectivist, who views the masses as a tool to be used
in their selfish quest for riches. Europe provided the spawning grounds for
such elite ideology, purveyors of which included: Lord Rothschild and Adam
Weishaupt; soon to be followed by Cecil Rhodes, Oxford Professor John Ruskin,
and Lord Milner.

Under Hamilton's direction, Congress chartered the First Bank of the United
States in 1791. The First Bank was granted the monopoly of the coveted power
to issue notes. The charter was for 20 years and no other national bank was
permitted. The former partner of Robert Morris, Thomas Willing, was appointed
president of the Bank.

Central banks attain their influence from the government's sanction to emit
paper bank notes that circulate as legal tender. This is key to their power.
By establishing a central bank based upon fractional reserve lending, a system
is created that allows for the use of book-entry loans and hence - money, a
number of times greater than the actual money the bank has in reserves. In
other words, they get to loan out money they do not have. By the magic powers
of credit, money is created - from out of nothing, but the want, thereof.

In 1811, the charter for the First Bank of the United States expired. President
Madison, another of the elite guard, fought hard to recharter the bank. Congress
failed by only one vote to reissue a new charter. Thus ended the First Bank
of the United States.

SECOND BANK OF THE UNITED STATES

Shortly after the closing of the First Bank of the United States, America
found itself in the War of 1812. The sinews of war being money, huge sums were
suddenly in demand. Private banks began to spring up overnight, issuing hoards
of bank notes to pay for badly needed war supplies.

Although the banks issued paper money, it was supposedly redeemable in gold
and silver. But the costs of war were overwhelming, and the banks succumbed
to the excesses of the printing press: issuing notes they could neither honor
or redeem.

Congress made the fatal mistake of allowing the banks to suspend payment in
specie for over two years, until 1817. The suspension of the redemption of
paper in gold and silver set an evil precedent that still haunts our country
to this very day - the curse of dishonest banking: the breaking of one's contractual
obligations and promises. Further suspensions occurred in 1819, 1837, 1839,
and 1857.

Soon it was seen that the banking system was in total chaos. Something had
to be done. Either banks had to honor their obligations and contracts, or a
central bank was needed as a lender of last resort: the fall back guy that
the state banks could rely on for credit, when the going got tough.

The honorable choice was the first option, but such was not to be, and the
Second Bank of the United States was founded, in 1816. The Second Bank's charter
was fairly close to the First Bank's: both were to issue paper currency redeemable
in silver and gold, to purchase a large portion of the government debt, and
to be the depository for Treasury funds.

President Madison guided the Second Bank through Congress with the help of
the rich Philadelphian lawyer and Secretary of the Treasury, Alexander J. Dallas,
his close friend John Jacob Astor, and another rich Philadelphian lawyer by
the name of Stephen Girard (reputed to be one of the two wealthiest men in
America). The president of the bank was William Jones, a close friend to Dallas.
This was the third public institution of the moneyed interests.

The Second Bank's real expansion of power came under the presidency of Nicholas
Biddle, another Philadelphian in the royal line of descent. Biddle headed the
Bank from 1823 to the repeal of its charter in 1836, building it into the most
powerful banking house in the country. After the repeal of the bank's charter
by President Jackson, Biddle continued to operate the bank under a Pennsylvania
State charter for several years.

The alleged reason for another National Bank was to curtail the inflationary
problems caused by excessive note issue, originally redeemable in gold and
silver; but as we have seen, redemptions had been suspended, causing further
depreciation in the purchasing power of paper currency.

So what did the Second Bank of the United States do to stop the flood of paper
money? Initially the bank was to raise $7 million in specie as reserves, it
never acquired more than 2.5 million. In 1818, the Bank had 2.36 million in
specie on reserve, and 21.8 million of notes and deposits on record. Within
one and half years the bank had added 19.2 million to the Nation's money supply;
pyramiding at a ratio of 9.24 times reserves, which gave a reserve ratio of
.11 - a mockery of inflation control and sound monetary policy.

Such a huge increase in the money supply caused a boom to occur - prices skyrocketed.
The bank was in danger of not being able to honor redemptions in specie, so
it had to contract the money supply. In one year (1818) the money supply decreased
from 21.9 million to approximately $11.5 million - a reduction of 47%. Bankruptcies,
defaults, and an overall bust of the economy resulted; a textbook example of
the boom and bust cycles that paper money and fractional reserve lending can
create. The only way to stop deflation is to prevent the inflation that leads
to it.

JACKSON VERSUS THE BANKS

The devastating effects of inflationary excesses followed by deflationary
contractions, were two of the most compelling reasons behind Andrew Jackson's
battle against central banking. Several times throughout the 1830's - 1850's
the country was shaken by similar events, the worst being the deflations of
1839 and 1857.

Jackson was an advocate for hard money, according to the constitutional system
of honest weights and measures of silver and gold coin. He opposed the banks
monopoly of the power to issue paper money based on the national debt. Jackson
was against government intervention in the markets; and he believed in Thomas
Jefferson's laissez-faire philosophy of free markets and the right to private
property.

President Jackson methodically disestablished the Second Bank of the United
States beginning in 1833 and ending in 1836, by removing the Treasury deposits
from the bank and placing them in state banks. Nicholas Biddle didn't give
up easily, however, as he actually got the bank's charter renewal passed through
Congress: but Jackson remained undaunted - he vetoed the bill.

Biddle then used his crony Philadelphian associates to secure a Pennsylvanian
State banking charter; and the Second Bank of the United States became the
United States Bank of Pennsylvania, a commercial state enterprise. Even after
the disestablishment of the Second Bank of the United States, the battle of
the hard money Jacksonians raged on against the soft money interests; including
Nicholas Biddle and his Philadelphian cohorts, but now the fight was on the
State level.

Whenever the banks got into trouble, the government allowed them to suspend
redemption of their bank notes in specie. This is one of the most destructive
faults of a fractional reserve paper system - the moral hazard of not honoring
one's contractual obligations.

But the greatest evil of fractional reserve banking is that bank reserves
primarily consist of government bonds or the public debt; the base upon which
the banks are allowed to pyramid notes and deposits - "bonding" for the Treasury
Notes. The more government bonds the banks purchase, the more money it can
create and issue, which means the greater the public debt - the greater is
the supply of money. Monetization of public debt is synonymous with money creation:
a pestilence sent by Typhus "that walketh the Earth in darkness."

SUMMARY TO THE END OF CIVIL WAR

Both the Constitution and the Original Coinage Act of 1792 defined and set
the standard of our monetary system to be the unit of a dollar: a specific
weight of silver that was exchangeable for a specific weight of gold. The emission
of bills of credit or paper money was forbidden by the Constitution.

However, this was all on the National level of Government, none of which applied
to private banking; and there were plenty of private bankers ready and willing
to issue a plethora of paper bank notes, and they did.

In a letter to John Taylor in May of 1816, Thomas Jefferson stated:

"The system of banking we have both equally and ever reprobated. I contemplate
it as a blotleft in all our constitutions, which, if not covered,
will end in their destruction ... I sincerely believe, with you, that banking
establishments are more dangerous than standing armies; and that the principle
of spending money to be paid by posterity, under the name of funding, is
but swindling futurity on a large scale."

Elsewhere Jefferson said:

"I believe that banking institutions are more dangerous to our liberties
than standing armies. Already they have raised up a money aristocracy that
has set the government at defiance. The issuing power should be taken form
the banks and restored to the government to whom it properly belongs."

What was the "blot" left on our Constitution that Jefferson was referring
to, which if not covered would end in its destruction? This is a question of
the gravest importance, which should receive the undivided attention of our
elected representatives, as our freedom and liberty hang in the balance.

The blot that Jefferson spoke of is exactly what we have seen: the legal crack
in the Constitution that left the door wide open for the international bankers
to gain access to our monetary system; and the resulting implementation of
fractional reserve lending of paper bills of credit, their modis operandi;
all precipitated by the inherent weakness of a bimetallic monetary currency,
where one metal is set as the standard, and the exchange rate is fixed between
the two metals, allowing Gresham's Law to do the dirty work.

Once the culprits had squeezed through the door, they continued to expand
their influence and dominance over the financial system. The first central
banks grew in size and power, which was deftly wielded to persuade members
of Congress to join the "ranks".

Up until the Civil War and the legal tender Greenbacks, private banks had
issued all paper currency, either by the First and Second Banks of the United
States, or state banks. With the printing of the Greenbacks, banking entered
a new era. Congress had failed to follow the constitutional disability not
to issue paper bills of credit.

The United States went off of the specie redemption standard in 1861, and
did not go back on it until the Resumption Act was officially implemented in
1879. During the years of 1819, 1837, 1839 and 1857, gold and silver redemption
was also suspended.

Further suspensions would be forthcoming in the financial panics of 1884,
1893, 1907, 1909, and 1921, with the final coup in 1934: Roosevelt's Gold Reserve
Act that outlawed private ownership of gold. Any allusion to a gold standard
or any other metallic standard actually being contractually honored and practiced
during these times is mere illusion and the stuff of fairy tales.

Only the banking business is allowed to dishonor or suspend their contractual
obligations in this way. Any other type of business that operated in this unredeeming
manner - would be investigated for allegedly committing fraud, extortion, and
embezzlement, and most likely face legal prosecution. Greed knows no limits;
the innermost recesses of the soul are not immune to its poisonous effects.

Douglas V. Gnazzo is the retired CEO of New England Renovation
LLC, a historical restoration contractor that specialized in the restoration
of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous
websites, and his work appears both here and abroad. Just recently, he was
honored by being chosen as a Foundation Scholar for the Foundation of Monetary
Education (FAME).

Disclaimer: The contents of this article represent
the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as
investment advice or recommendations for specific investment decisions, and
you should not rely on it as such. Douglas V. Gnazzo is not a registered investment
advisor. Information and analysis above are derived from sources and using
methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility
for any trading losses you may incur as a result of your reliance on this analysis
and will not be held liable for the consequence of reliance upon any opinion
or statement contained herein or any omission. Individuals should consult with
their broker and personal financial advisors before engaging in any trading
activities. Do your own due diligence regarding personal investment decisions.
This article may contain information that is confidential and/or protected
by law. The purpose of this article is intended to be used as an educational
discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal
scholar. Information and analysis derived from the quoted sources are believed
to be reliable and are offered in good faith. Only a highly trained and certified
and registered legal professional should be regarded as an authority on the
issues involved; and all those seeking such an authoritative opinion should
do their own due diligence and seek out the advice of a legal professional.
Lastly, Douglas V. Gnazzo believes that The United States of America is the
greatest country on Earth, but that it can yet become greater. This article
is written to help facilitate that greater becoming. God Bless America.